TUNIS (Reuters) - Tunisia will raise fuel prices in the coming days but hold off increasing public wages this year to meet terms of the International Monetary Fund for its next loan tranche, a government official and diplomatic sources told Reuters.

A gas station attendant pumps fuel into a customer's car at a gas station in Tunis, Tunisia June 01, 2018. REUTERS/Zoubeir Souissi

Tunisia has dropped into a deep economic slump following the overthrow in 2011 of autocratic leader Zine El-Abidine Ben Ali.

Although its successful democratic transition since then contrasts with other “Arab Spring” countries, nine governments have failed to cut the budget deficit and revive an economy hit by a lack of investment and militant attacks on tourists.

Loan talks have been complicated by a row inside the ruling coalition of secularists and moderate Islamists — over the extent of reforms and a possible cabinet reshuffle — that coincided with a visit this week from an IMF delegation.

The new austerity measures are likely to meet resistance from the powerful labour union UGTT and people tired of austerity, galloping inflation and political instability.

Tunisia agreed with the IMF in December 2016 on a loan programme worth around $2.8 billion to overhaul its ailing economy with steps to cut chronic deficits and trim bloated public services, but progress has been slow.

The IMF delegation visited Tunisia this week to review with officials the next tranche worth around $250 million which, if approved, would bring total payments since 2016 to $1.2 billion.

The government official said fuel prices would rise by 0.070 dinar ($0.027) a litre in the coming days, the third hike this year but less than the 0.100 dinar the IMF had asked for, as the government has whittled down subsidies on imported fuel.

For 2018, Tunisia had budgeted 1.5 billion dinars in subsidies but with a recent rise in global oil prices it would have to spend 4 billion to avoid a rise in pump prices, he said.

“The IMF is demanding that the (fuel price) increase in all 2018 be about 0.500 dinar, but we want the adjustment to be acceptable to curb inflation,” the official said.

To appease donors, Tunisia also wants to delay a public salary increase considered for 2018 until next year though this needs to be negotiated with the labour unions, he added.

The North African country also plans to sell Eurobonds worth $1 billion over the next two weeks to help fund the budget, the official said.

IMPATIENCE

Western governments, worried about high unemployment driving Tunisians into illegal migration or Islamist militancy, have strongly backed Tunis during the post 2011-transition even without much evidence of progress on economic reforms.

But in a sign of increasing donor impatience, diplomats said, the United States abstained when the IMF voted to approve the most recent loan tranche.

The government has been trying to cut the public sector wage bill to 12.5 percent of GDP in 2020 from 15 percent — one of the world’s highest — by offering voluntary redundancies. But few have taken up the offer due to high unemployment.

The UGTT union, the political kingmaker in Tunis, has rejected plans to dismiss public servants and sell loss-making state firms.

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To avoid layoffs the government increased taxes and duties at the start of the year, hitting banks and other sectors and triggering two weeks of riots.

On Tuesday Prime Minister Youssef Chahed said the president’s son had destroyed the ruling Nidaa Tounes party, of which Chahed is also a member.

The president’s son, Hafedh Caid Essebsi, who is the leader of Nidaa Tounes, had called for Chahed’s dismissal because of his government’s failure to revive the economy. But the moderate Islamist party Ennahda, Nidaa Tounes’ coalition partner, backed Chahed.